Submitted by Leo Kolivakis, publisher of Pension Pulse.
New York’s Attorney General Andrew M. Cuomo said on Friday that his office was issuing more than 100 new subpoenas to investment firms and intermediaries who brokered deals with public pension funds, in the latest expansion of his corruption investigation:
Mr. Cuomo said a preliminary review by his office found that as many as half of the intermediaries in pension fund transactions in New York State and New York City were not properly licensed and registered with a broker-dealer, as required by federal securities laws. Failing to register could violate both federal securities laws and the Martin Act, a sweeping state securities law.
“The troubling pattern of unlicensed agents highlights yet another systemic weakness in New York’s pension fund, creating a situation which is fraught with peril and prone to abuse,” Mr. Cuomo said in a statement.
He also conferred with the offices of 35 other attorneys general Friday afternoon by teleconference. The pension corruption inquiry has raised questions about public investment practices in other states, in particular New Mexico and California.
Afterward, Mr. Cuomo said the group had “decided to create a multistate task force to explore pension fund abuse.”
Mr. Cuomo’s office has been working with the Securities and Exchange Commission, which is conducting a parallel investigation. Federal investigators are also reviewing public investment transactions in New Mexico, and the S.E.C. is reviewing pension transactions in California.
Among the firms being scrutinized in the latest round of Mr. Cuomo’s inquiry is Wetherly Capital Group, according to people with knowledge of the inquiry. Investigators are scrutinizing whether employees of Wetherly and other firms were properly licensed when they arranged deals with pension funds in New York.
Wetherly is a Los Angeles-based placement agent firm run by Dan Weinstein, a prominent Democratic fund-raiser. In a statement, Wetherly said it was fully registered with the Financial Industry Regulatory Authority and the S.E.C.
Wetherly has come under scrutiny in California for paying a firm affiliated with Hank Morris, a top aide to Alan G. Hevesi, the former New York State comptroller, as part of an investment deal it brokered for Calpers, the giant California pension fund.
Another California firm being scrutinized in the latest round of the investigation is Gold Bridge Capital, which has acted as a placement agent on at least one deal involving the New York State pension fund.
The inquiries by Mr. Cuomo and the S.E.C., under way for two years, have focused on the millions of dollars that friends, relatives and aides of Mr. Hevesi’s gained by selling access to the $122 billion New York State pension fund. Mr. Morris and David Loglisci, another former top aide to Mr. Hevesi, have been indicted on a variety of corruption-related fraud charges, and Raymond B. Harding, the former head of the state Liberal Party, has also been charged in the case. All three have pleaded not guilty. Mr. Hevesi has not been charged.
The inquiries took on more national relevance on Thursday when Mr. Cuomo charged a top consultant to pension funds around the country, Saul Meyer, with a fraud-related felony. Mr. Meyer and his firm, Aldus Equity, which is based in Dallas, were also charged in a civil complaint by the S.E.C. Both Mr. Meyer and Aldus denied wrongdoing.
The new phase of the inquiry focuses on lobbyists, political consultants and others who brokered deals between investment firms and the New York pension funds but were not properly registered to do so.
In a preliminary investigation, Mr. Cuomo’s office found that from 2003 to 2006 — the period when Mr. Hevesi was comptroller — 22 of the 45 intermediaries used in deals at the state pension fund were not registered. In the New York City pension funds, 17 of 41 intermediaries were unregistered in deals from 2003 to this year, a review found.
While acknowledging that there could be exceptions, Mr. Cuomo said during a separate teleconference with reporters on Friday, “If you’re brokering a security, you need to be regulated.”
Thomas P. DiNapoli, the New York State comptroller, and William C. Thompson Jr., the New York City comptroller, both said this week that they would move to ban placement agents from deals with their pension funds.
Mr. Cuomo also highlighted a shortcoming in state lobbying rules, which do not require lobbyists to register with the state’s Commission on Public Integrity when they appear before the state comptroller.
The increased scrutiny on placement agents in recent years has led to concerns that lobbyists and political consultants are trying to find ways to perform similar services without registering as placement agents.
In 2007, Mr. DiNapoli met with the chief partner of the private equity firm InterMedia Partners, Leo J. Hindery Jr., and Roberto Ramirez, a lobbyist and former colleague of Mr. DiNapoli’s from the Assembly. The goal for the meeting was to convince the state comptroller’s office to increase its investment with InterMedia, which it later did. A spokesman for Mr. Ramirez has said he was not paid by InterMedia and appeared only as a friend of Mr. Hindery’s.
Mr. Cuomo would not say which lobbyists or consultants were being scrutinized, but said the intersection of unregistered agents and the pension fund was potentially “the Wild West of government relations.”
Mr. Cuomo also said that pension kickbacks are a national problem:
New York state’s criminal probe of kickbacks paid by companies eager to manage its $122 billion state pension fund has exposed “a national network of actors” whose schemes are ongoing, state Attorney General Andrew Cuomo said on Thursday.
“This is all across the nation, and it’s continuing today,” the Democratic attorney general said on a conference call.
The probe, which began two years ago, has fixed the spotlight on the use of placement agents hired by investment firms to open the doors of the New York State Common Retirement Fund. Cuomo said he is also is scrutinizing lawyers and lobbyists.
The investigation is another effort to stamp out graft and the practice of “pay to play,” which involves giving gifts or campaign donations to win public contracts. So far the probe has looked into the web of relationships and business contracts involving money managers, politicians and pension officials spanning the country from New York City and the state capital, Albany, to Texas, New Mexico and California.
On Thursday, the U.S. Securities and Exchange Commission, which is working with Cuomo, charged that Dallas-based Aldus Equity Partners won New York pension business because of “its willingness to illegally line the pockets of others.”
The state pension fund had aimed to hire more women and minority-owned investment firms and had begun talks with one. But Aldus was chosen, Cuomo said, when the minority-owned firm “allegedly refused to pay kickbacks to Morris and another associate.”
Aldus, a private equity firm, says it manages over $5 billion, and the probe already has cost Aldus clients in New Mexico and New York. Cuomo said Aldus also is active in Louisiana, Oklahoma, Texas, California, and New York City.
ANOTHER VIEW OF GIVE AND TAKE
Both Cuomo and the SEC charged that Saul Meyer, an Aldus founder, paid about $320,000 to a shell company owned by Henry Morris, a top fund-raiser for New York’s former state comptroller. This led the New York state pension fund’s then-chief investment officer, David Loglisci, to invest $375 million with Aldus from 2004 to 2006.
Demonstrating the power that Morris wielded over pension investments, Cuomo said Morris told a Meyer intermediary: “Tell that little peanut of a man that I can take business away as easily as I provided (it).”
Lawyers for Morris and Loglisci, who were indicted in March, say they are innocent.
On Thursday, Meyer was charged with a state securities felony and released on $200,000 bail. His lawyer Paul Shechtman said: “Time and evidence will show that Saul Meyer did nothing wrong.”
Aldus knew that Morris was “working both sides of the deal,” Cuomo said, by marketing funds for investments in the Aldus/NY Emerging Fund in which Morris had a 35 percent stake.
Aldus Equity lawyer Matthew Orwig faulted the SEC for acting before finishing its probe, calling the threatened legal action “appalling and careless with the law and with people’s reputations.” Aldus partners said they were disappointed by the “unexpected legal developments.”
Aldus could face more legal peril. The New York state pension fund is weighing legal remedies against Aldus and Meyer after ending its investment with the firm. New York City pensions could cut ties with the firm, while New Mexico’s governor called on the state Education Board to drop its contract with Aldus a day after ordering the state investment officer to do so.
Cuomo said that while Meyer was seeking more business with New York’s pension fund, he helped Daniel Hevesi, a son of Alan Hevesi, the former state comptroller whose oversight of the state pension fund is being probed, earn a $250,000 fee on a New Mexico pension deal.
Alan Hevesi’s lawyer Bradley Simon has said the former comptroller “has not been charged with any misconduct with respect to mismanagement of the New York state pension fund.”
Bloomberg reports that L.A. pension is baffled by fees paid to firm in probe:
Los Angeles retirement plan managers say they’re baffled over fees paid by Quadrangle Group LLC to a key player named in New York’s pension fund kickback probe for helping the private equity firm land work in California.
Quadrangle paid Searle & Co. $150,000 in connection with the Los Angeles Department of Fire and Police Pensions fund’s $10 million investment with the New York firm, which was co- founded by Steven Rattner before President Barack Obama appointed him to oversee the auto industry rescue.
Searle employed Hank Morris, a political adviser accused by New York State Attorney General Andrew Cuomo and the U.S. Securities and Exchange Commission of using the Greenwich, Connecticut, brokerage to collect “sham” placement fees from firms that manage New York pension plan money.
After the SEC this month said Quadrangle paid Morris a “finders fee” related to a New York pension fund investment, Quadrangle told the Los Angeles fund that it also had paid placement fees to him for work there. The Los Angeles fund publicly disclosed the fee April 24.
“We don’t know how or why a placement fee related to our investment in Quadrangle was made,” Michael Perez, the general manager of the Los Angeles pension, said in written responses to questions from Bloomberg News.
‘Shocked’ at News
Perez said the fund’s investment in Quadrangle was arranged through Pension Consulting Alliance Inc., which evaluates investments on its behalf. Allan Emkin, that company’s founder and managing director of its Los Angeles office, said it didn’t have any contact with Searle or Morris and worked directly with Quadrangle. Emkin said he had been unaware that Searle was paid a fee in connection with the deal.
“We were shocked when we heard about it,” Emkin said in a telephone interview.
Morris, who faces a civil SEC complaint and criminal charges by Cuomo, has denied wrongdoing. Quadrangle and Rattner haven’t been charged. Adam Miller, a spokesman for Quadrangle, declined to comment. Searle referred calls to Peter Anderson, an attorney, who didn’t respond to requests for comment.
The SEC has asked the Los Angeles fund and two of its board members for information about investment decisions and firms tied to the New York probe.
Cuomo said today that New York was formalizing agreements to coordinate its investigation with authorities in California, as well as with Connecticut, Illinois and New Mexico.
Los Angeles Connection
“We are disclosing a national network of actors, who often acted in concert,” Cuomo said. “They collaborated, they often partnered and victimized states and taxpayers all across the country.”
The SEC and Cuomo today charged Saul Meyer, the managing partner of one of the firms in the New York probe, Aldus Equity Partners, with paying Morris to secure investment business with New York. Aldus has served for more than a year as a private equity consultant to the Los Angeles pension fund. Meyer met with the fund’s board at least once, city records show.
Morris, the one-time chief fundraiser and political adviser to former New York City Comptroller Alan Hevesi, has been charged by the SEC with collecting $15 million in kickbacks from money managers doing business with New York’s pension fund. The SEC says the kickbacks were masked as placement fees and that he “rarely, if ever” provided legitimate services.
Quadrangle hired Morris as a placement agent before winning a $100 million investment from New York, the SEC said in an April 15 complaint. The firm paid Searle $1.125 million, and 95 percent of that went to Morris, the SEC said.
The Los Angeles pension approved investments in 10 private equity funds linked to the New York investigation, according to an April 2 memo to the board. Two of the investments were later canceled. Aldus Equity Partners, which was drawn into the New York probe, also advised the fund on private equity investments.
I have already written about the Mother of all stealth scams. Nothing like a huge financial crisis to bring out all the cockroaches. This hardly surprises me and remember my dire warning: Madoff was the tip of the iceberg. There will be many more fraudsters that will get nabbed in the next few years.
Just how systemic is fraud in the financial industry and at public pension funds? We don’t know, but when you mix greedy placement agents with public pension fund managers who control billions, the potential for kickbacks is huge.
What can pension funds do to stop abuse before it happens? First, they should segregate duties so the person(s) making the investment has to pass through several checks, including an internal auditor, before the decision is cleared. Importantly, there should also be clear segregation of duties between those making the investment decisions and the finance professionals valuing them.
Second, pension funds need to beef their whistleblower policies so people are encouraged to report abuse. This is one of the most effective ways to stop fraud. Maybe there should be a direct link between public pension fund employees and the state’s Attorney General’s office or the provincial or federal Auditor General’s office.
Third, have your fraud procedures verified by a certified fraud examiner (read more on CFEs by clicking here). This should include someone who scrutinizes travel/meal/entertainment expenses to make sure there is no abuse going on when some hedge fund or private equity manager is trying to woo a pension fund manager to invest with them.
Fourth, there should be tight rules governing the relationships between investment managers and the funds they invest with. If you are investing billions with Fund Z, then you should not be allowed to go work for them for a period of five years after you leave a public pension fund. This is just common sense, but you’d be surprised how common sense often falls by the wayside.
Fifth, all board decisions should be made public so they are open to scrutiny. Several of the large U.S. state plans already do this. For example, Alaska’s Permanent Fund publishes its board schedule, their minutes and their consultants on their website.
Finally, on the legal front, I would ban all placement agents and place tight rules on pension consultants who recommend funds to pension funds. Do not underestimate the abusive practices of pension consultants and the potential for fraud with them. They are the gatekeepers at most U.S. pension plans.
It truly is the Wild West out there, but I am glad to see the Attorney General of New York is pursuing the pension probe and trying to clean up public pension funds.